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HSA 401(k) retirement

Retirement Prep Tips for Those with HSA and 401(k)

October 6, 2020

Financial stress is something that affects many of us. A recent study found that 58 percent of Americans are stressed about their finances. And half of those who are stressed say that it distracts them at work

You can help alleviate your employees’ financial stress by empowering them to take control of their financial outlook. Increasingly, employers and employees are turning to health savings accounts (HSAs), which are savvy retirement-planning tools. Additionally, the 401(k) is a staple employee benefits offering, and the majority of HSA participants also have a 401(k). Sharing tips with those employees who participate in both accounts will give them peace of mind and boost productivity. 

Re-shape the HSA conversation

Even though the word “savings” is in the name, health savings accounts are still viewed as spending accounts rather than savings vehicles. Only about half of all Americans know their health benefits offerings can be used for retirement, despite the increase in those participating in HSAs and high-deductible health plans (HDHPs). While many of your employees may need their HSA to produce savings in the short-term, there’s clearly an HSA education need. 

Those who use HSAs only for present-day savings are missing out on two of the account’s biggest perks: 

  • All funds roll over from year to year, so they’re effective retirement-planning tools.
  • Earnings within an HSA (through interest or investment) build tax-free. 

If you also offer a 401(k), talk about your HSA offering with your 401(k), since the two accounts have much in common. And provide your employees access to a financial expert or planner if they would like advice on how to maximize their participation. 

Incentivize and communicate

Do you match or contribute to your employees’ HSAs or 401(k)? You can save when you do. Your HSA contributions are tax-free. Your 401(k) contributions are also tax-deductible on your federal income tax return, as long as your “contributions do not exceed the limitations described in section 404 of the Internal Revenue Code.” And you’re showing your employees you care about their financial wellbeing.

If you provide an HSA or 401(k) contribution to your employees’ accounts, communicate that to them during open enrollment and also throughout the year. It’s free money that will encourage participation. And communicating this throughout the year is important because your employees can increase their HSA contributions at any time. 

Play to each account’s perks

HSAs are considered “the holy grail of tax planning” due to their tax benefits. And because they can be used to provide immediate savings on eligible expenses, they offer more flexibility than a 401(k). Withdrawing funds from a 401(k) before the age of 59½ comes with a tax penalty, while HSA funds can be withdrawn at any time tax-free as long as they’re used to purchase eligible expenses.

HSAs also provide more diverse options for investing funds than they did just a few short years ago. For example, our health savings brokerage account within our HSA gives participants access to more than 5,000 mutual funds and other investment options. All of this provides employees with good reason to max out their HSA contributions before contributing to a 401(k). 

An HSA does have a lower contribution limit than a 401(k). So, once an employee does max out their HSA contribution, they can turn to their 401(k) to put even more money aside to achieve their long-term goals and secure the retirement of their dreams. 

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